255 Paper 3 Answer the following:
1. Suppose that on January 1 the exchange rate between the U.S. dollar and the European
Union euro was $1.40 to buy one euro. On December 31 of that year, a person needed
$1.45 to buy one euro. Over the course of that year, did the dollar appreciate or depreciate
against the euro? Did the change in the exchange rate make it easier or more difficult for
American college students to spend a semester at a European university?
Explain.
2. What will happen to the money supply if Jamie withdraws $400 from her checking account
and the required reserve ratio is 5%?
3. How does a nation’s saving rate, as measured by the marginal propensity to save, affect the
size of the spending multiplier? Explain with both intuition and the formula for the multiplier.
size of the spending multiplier? Explain with both intuition and the formula for the multiplier.
4. What is meant by the term “social insurance”. Give an example of a social insurance program.
5. What is the goal of expansionary monetary policy and how does it work in the short run?
6. Most economists do not support a law that requires the federal budget to be balanced every
year. Explain why.
year. Explain why.
7. Explain the difference between fiscal and monetary policy.
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